According to the 2018 ACFE Report to the Nations on Occupational Fraud and Abuse, companies in the professional services industry are most at risk to be negatively impacted by expense reimbursement schemes, billing schemes and check and payment tampering schemes. Over the years, we at Schneider Downs have seen a number of companies impacted by each of these fraud schemes.
Recently, we completed an assignment with a company in the professional services industry that suspected a senior-level manager had been orchestrating a billing scheme by overbilling clients in order to inflate revenues. In investigating the company’s financial activity and billing processes, we discovered numerous issues, in addition to the overbilling.
Billing schemes attack the cash disbursements and payables cycle by making false claims for payment from the victim company. These bogus claims induce the victim company to issue payments for goods or services not received. Fraud perpetrators can accomplish this in a variety of ways:
Invoicing via shell companies, wherein a fictitious entity is created for the sole purpose of committing fraud
Invoicing via non-accomplice vendors, wherein fraudsters use invoices in the name of existing vendors to generate fraudulent payments
Overbilling by falsifying or inflating billing records
Personal purchases with company funds, by using company accounts to buy items for themselves, their businesses, their families, etc.
During our initial review of the company’s financial documents and interviews with personnel, we immediately noticed some red flags, including a lack of segregation of duties, a lack of formalized client billing policies and procedures, the fact that budgets were not prepared or utilized, lack of oversight and an inactive board of directors.
Once we completed the investigation and interviews, we provided our findings and recommendations to improve procedures and internal controls specific to the billing process, including:
Develop policies and procedures regarding fees, billings, time entry, credit memos, etc.
Billing rates should be standardized, reviewed on an annual basis and approved by the board of directors each year.
Engagement letters used by the company should be standardized and reviewed by legal counsel
Write-ups and write-downs of work-in-process and fees invoiced when compared to standard rates need to be reported, reviewed and approved by appropriate levels of executive management and the board of directors.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.